The global fight against the Covid-19 pandemic continued during the month and the policy of lockdown has been shown to work with fewer active cases and confirmed deaths being reported in many countries thus reducing pressure on hospitals and paving a way to a gradual easing of restrictions. Most advanced countries have started or want to gradually return to a level of economic normality and so far the evidence seems encouraging that this can be achieved, if managed carefully, without triggering a second wave of infections.

Over the course of the month, however, the economic toll that the pandemic has inflicted became clearer. The Bank of England has been aggressive and swift in its response with the objective of helping to contain its economic impact and to prevent a deep recession turning into a financial crisis. Despite this the BOE estimated that real GDP contracted by 3% in Q1 2019 and projected a further 25% fall for Q2 2020. It also forecast unemployment to rise to 9% in Q2 2020 despite the widespread take-up of the Coronavirus Job Retention Scheme. As part of its May Monetary Policy Report it also published a headline scenario forecasting a ‘V-shaped’ recovery from this recession with growth recovering by 15% in 2021 after a drop of 14% in 2020.

Such a recovery depends upon a gradual reopening of society and during the month the government announced a movement into Phase Two of the crisis, whereby economic activity restarts in stages whilst adhering to social-distancing practices in order to prevent a second wave of the virus. Reflecting the higher number of active cases and a greater risk of a second spike in infections, the initial steps out of lockdown for the UK were more tentative than those in continental Europe. Continued restrictions in sectors such as retail, tourism and entertainment mean the impact of the crisis will affect different parts of the economy unevenly. Recent announcements will benefit the construction and manufacturing sectors most. If the relaxation measures progress well, some parts of the hospitality industry would begin to open up in July.

Phase Three of the crisis will only be reached when a medical solution, such as a vaccine or effective treatment, becomes available and to date there has been limited tangible progress. Encouragingly, the economic survey data suggests that the worst of the crisis is behind us and indicate both that economic sentiment has improved markedly and that economic activity has begun to increase in advance of lockdown measures easing.

Whilst the spectre of Covid-19 loomed large during the month, a couple of political issues that preoccupied investors in 2019 returned back into view. China announced its intention to impose a national security law in Hong Kong, further inflaming tensions in the region and eliciting strong international criticism, particularly from the US which threatened further sanctions. Relations between the US and China have deteriorated since December’s initial trade deal and as the US enters the run-up to a presidential election later in the year we should anticipate further volatility. Closer to home, Brexit negotiations rumble on with little sign that trade talks have made much progress. With the UK adamant it will leave the single market and customs union at the end of the year, the risk remains that a disorderly exit will result.

Against this backdrop and following a strong month of recovery for the fund in April, performance paused for breath whilst the wider market continued to make progress. There was a notable performance difference between quality and value stocks and underperformance of certain domestically exposed companies during the month. Perhaps this reflected concerns over the more limited relaxation of lockdown measures in the UK as well as a more cautious approach until is the hoped-for a V-shaped recovery appears.
During the month the TB Wise Multi-Asset Income fund fell 1.7%. This compared to a rise of 3.0% for the target benchmark CBOE UK All Companies index and a rise of 3.8% for the IA Flexible sector average.

Reflecting higher Iron Ore prices and the prospect of increased Chinese infrastructure spending to stimulate their economy, Rio Tinto (+17%) and Blackrock World Mining (+9%) performed strongly as did certain companies which have felt the impact of Covid-19 most acutely but where restrictions look set to ease. Whilst Shoezone (+23%), Easyjet (+13%), Bakkavor (+13%), and Sthree (+9%) rose, it was notable that such performance was not uniform. Certain Property holdings and Financials positions fell despite the improvement in lockdown restrictions. U&I (-15%), NewRiver Reit (-20%) and Palace Capital (-7%) have all suffered from reduced rental income as retail clients withhold rent whilst unable to trade. Material discounts to net asset values already appear to reflect this, however, and it is interesting to note a pick-up in corporate activity post month end in advance of shops reopening for business.

With regards to transactions during the month, we have remained focussed on our twin objectives of trying to replenish lost income as a result of announced dividend cuts whilst not sacrificing the prospect of capital upside. We have sold our holdings in BT, Lookers and Photo-me where we have reduced conviction in the medium term investment case and have increased our holdings in funds, such as Aberdeen Asian Income, Middlefield Canadian Income, Ecofin Global Utilities and Infrastructure and European Assets Trust, where we have been encouraged by recent commitments to paying dividends. We have added to British Land and Taylor Wimpey where we believe a material valuation opportunity warrants further investment despite dividends being currently suspended. We expect both companies to be early returners to the dividend list. Finally, we added a corporate bond investment in the Provident Financial 7% 2023 corporate bond. We understand the credit well as we already have a holding in the equity and believe the yield of 10% on purchase provides a highly attractive annual coupon whilst a redemption at par in 3 years’ time would provide further capital upside of 21%.

Philip Mathews31 May 2020
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